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The Cambrian Explosion In Startups

(Tech Crunch) - The sheer number of new startups forming and getting funded these days is dizzying. It’s never been easier to start a company to harness new technologies and turn them into products. Traditional venture capital may not even be able to keep up with it. We are at the beginnings of what may very well become a Cambrian Explosion of startups, which will have implications well beyond the technology industry to the entire economy.

We’ve spent the last 15 years building out the tethered web. The next 15 years will be about connecting the web, and the broader internet, to the physical world. And mobile is just the start.

We will soon be able to shrink fully-functional computers into almost anything—mobile phones and tablets today, TVs, car dashboards, and wearable devices tomorrow. And they will all be connected to the network. The only limit to what can be done with these connected computing devices will be what entrepreneurs and engineers can dream up.

The Cambrian Explosion is a useful metaphor. During the real Cambrian Explosion, of course, many new species were created. But how many of them thrived? How many quickly became extinct? It was a period of rapid evolution, with new species both emerging and dying off quickly. In the end, the world was better off from an evolutionary perspective, but not every new animal survived, just like every new startup won’t survive.

Early evidence of this Cambrian Explosion is already showing itself. Last year, for instance, there were more than 1,100 seed/angel funding rounds, up from 855 in 2008, according to Crunchbase. That was a 33% increase in just two years, and 2011 looks like it will surpass 2010. Why are there so many more early stage startups? I believe there are two reasons. The barriers to creating a startup are falling away, and the market opportunities have never been greater. (This is tempered by the current global economic malaise, and serious concerns about how many of these early stage startups will make it past the seed stage, which I will address later on).

Let’s talk about the lower barriers to startup creation. First, there is less capital required than ever before, while at the same time there is more capital available (at least for seed stage companies). The advent of cloud computing, open source software, and plug-and-play APIs for every web platform means that 3 coders can create a product for a few hundred thousand dollars instead of the few million it would have cost just ten years ago. They can start lean, learn from their early customers, and improve the product along the way.

On the opportunity side, the potential online audience is bigger than it’s ever been before, with 2 billion people online, and even more of them are moving to mobile. The Internet is no longer just the desktop Web. It is apps for mobile phones and tablets which pull data from the internet but never launch a browser. It is connected devices like Jawbone’s Up bracelet that monitors your physical activity. And that is just scratching the surface.

There are whole industries yet to be seriously touched by the Internet, but which could benefit from better information: health, education, transportation, energy consumption—to name just a few. The consumer internet has basically zero barriers to entry, which is why we see so much action there, but brave entrepreneurs are beginning to take the same principles and apply them elsewhere. In health, for instance, where there are regulatory requirements or in education, where institutions hold the keys to the kingdom, internet startups are beginning to make some serious headway.

The internet is today’s steam engine. Anyone can tinker and build an app or a web business. The pace of innovation is similar to what was seen during the tail end of the industrial revolution in the late 1800s when anyone with a barn (the garage of its day) could apply steam engines to all sorts of practical uses, including machinery and vehicles. The barriers to experimentation were similarly low back then. But now the engine is the internet itself. Any product or service that is not connected to the internet is dead in the water.

Today’s most productive machine is the computer. But that machine is increasingly useless if it is not connected. What is the first thing you do when you turn on your computer? Launch a browser or check your email. Imagine a Kindle Fire or iPad as a standalone device. You wouldn’t be able to download any apps, books, or movies. Tablets and smartphones are merely interfaces to the network.

It’s not just that the network is the computer. The network is society, the market, and politics all rolled into one. We live our lives connected to the network at practically all times through various devices.

What seems frivolous in one context (using mobile technologies to organize a night out with your friends) can literally overturn governments in another (the Green Revolution in Iran, which gave rise to the Arab Spring, used Bluetooth-connected phones as its basic organizing network). Mobile, social, and local technologies are having a much deeper impact across the world than being able to offer up local deals on your mobile phone.

The internet is at its core an information network and a communications network. The ideal of better information, of perfect information, changes everything it touches. And while that creates new opportunities, it also creates new challenges. Every single industry, every single business that profits from information asymmetries, will be challenged.

Technology is not a panacea. It might very well be eliminating jobs faster than it can replace them. Technology makes industries more efficient, yes, but that also means they need to employ fewer people.

Just look at the data. Economic growth and employment growth used to go hand in hand, but now it appears as though they have been decoupled. Apple’s big new server farm in North Carolina, for example, employs only 50 people.

The Cambrian Explosion not only created millions of new life forms, it eliminated many of the weaker species that preceded it. They just couldn’t compete. I believe we are going to see a similar phenomenon in the coming decades on the economic front. The question is not whether it will happen. It is what side of the evolutionary divide do you want to be on?

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